INTELLECTUAL PROPERTY: Overseas competition

To domestic investors, US real estate is one of the most exciting investment opportunities to emerge for at least two decades.

With commercial property values already down between 25 percent and 35 percent from their 2007 peaks, and with further declines expected, US real estate represents one of the best bangs for your buck globally.

Zoe Hughes

The interest, though, is not just coming from US shores. Foreign investors are also turning their attention back to North America, after largely pulling away from the market in the latter part of 2008. Foreign investors have traditionally been active players in US markets, with Middle Eastern and German capital making up the bulk of foreign property investment in the US in 2007 and 2008, according to data provider Real Capital Analytics. Like their domestic rivals, foreign investors scaled back their operations at the height of the credit crisis, often retreating to their home countries.

However, as spring makes its presence felt, foreign investors are once again looking back to the US, with German capital (often open-ended funds) leading the push.

San Francisco-based Rockwood Capital is one private equity real estate firm to note the increased activity by foreign capital in US real estate markets of late. Rockwood has been actively looking at deals in key US cities, particularly in the office and multifamily sectors, after last month closing its latest value-added fund Rockwood Real Estate Partners VIII. However, on more than one occasion the firm's offer has been beaten at the final straight, in some instances by overseas investors or firms representing overseas investors. Managing director Samm Miller said German buyers were especially making their presence felt.

There are quite a few people talking about raising funds in Europe in order to invest in the US. It's a real opportunity because of the potential for growth.

“We are coming into one of the best investment periods in 20 years so there's a lot of interest and we believe there will be even more interest from foreign institutional capital in the near future,” she said. The assets in question failed to trade and are still on the market, but few doubt foreign investor appetites for US real estate will fade anytime soon.

“There are quite a few people talking about raising funds in Europe in order to invest in the US,” agreed another real estate professional, adding: “It's a real opportunity because of the potential for growth.”

Many foreign investors have cash to spare. German open-ended funds, which saw more than €5.3 billion of capital stampede out of their funds in September and October alone, are now starting to see retail investors steadily return to the fold with many preparing for new acquisitions in 2009. The euro has also gained significantly against the dollar since the lows experienced in March, giving open-ended funds added fire power. For other international investors, a more conservative approach to investing in the US during the property boom – which saw most sticking to straight equity or senior debt positions – has left them poised to act.

As Jones Lang LaSalle's international capital group managing director Steve Collins noted about a recent AFIRE (Association of Foreign Investors in Real Estate) conference. “The most striking observation was the difference in sentiment between the domestic and foreign attendees. US-based players were much more sombre about the current situation than the visitors from oversees,” he wrote in Real Estate Forum.

Foreign investors will continue to be cautious as they circle US waters, targeting high quality assets, particularly offices, in gateway cities such as New York, Boston, Washington DC, Los Angeles and San Francisco. It is a back-to-basics strategy also being adopted by many private equity real estate firms.

Such attention will make for greater competition. And with interest in US real estate markets only expected to grow stronger amid the expectation of RTC-style opportunities in the latter half of 2009 and early 2010, it is something private equity real estate firms need to prepare themselves for.